Top 6 Things You Should Know Before Refinancing a Business Loan

Business loan refinancing is a very common practice used by business loan borrowers to lower the cost of debt and get favorable repayment terms. Refinancing is nothing but taking another loan to completely repay the outstanding amount of the loan you previously took, at better terms, and/or a top-up amount. A business loan borrower can consolidate multiple debts into one, or balance transfer an existing loan. This also means you can swap all your expensive debts into one affordable debt. But, sometimes, despite the lower interest costs on the new loan, in certain cases, the economics doesn’t favor refinancing business loans. And, lenders can also refuse to refinance business loans if they find any issues with the repayment of existing business loans. 

Therefore, before applying for a business loan refinancing with a new/existing lender, here are a few things you should know. 

Does Your Existing Lender Offer A Business Refinancing Facility?

Not all lenders provide business refinancing facilities due to the complexities involved. You should confirm with your lender whether they refinance your business loans or not and whether you get a no-objection certificate (NOC) if any other lender does so.

In case your current lender doesn’t allow business refinancing, there are no other options than to continue repaying as per current terms, at least until you become eligible as per your lender’s policy.

What Will Be The Cost To Refinance Business Loans?

Business refinancing is like raising a new loan to pay off the existing debt and start repaying as per the new terms and conditions Therefore, the cost of refinancing includes processing fees for the new loan, pre-closure charges for the existing loan, and other charges.

Therefore, before applying for business refinancing, you should check whether the savings are greater than the total costs of refinancing.

1. Impact on Your Cibil Score

Business refinancing results in a hard inquiry on your credit report and if the lender finds any issues with the repayment of existing debt, your application for business refinancing will be rejected. It will impact your credit score and make it difficult for you to raise funds for a new loan in the future.

Apply for business refinancing only if your business credit score is in the higher range and you have a clean credit repayment history.

2. Compare the Interest Rate

The basic idea of business refinancing is to save interest costs on your existing loan. Therefore, before going for a business refinancing option, compare the business loan interest rate offered by different lenders and other costs. You should be able to calculate the total interest cost savings with the new arrangement before making an application for the same. You can use a business loan calculator to calculate the net savings accurately.

3. Status of Your Existing Loan

Business refinancing makes sense only when you have a considerable amount of repayment tenure left to service. If you have paid off a majority of the loan amount, the refinancing benefit will be much less and isn't worth the hassle.

Must Read: Top 9 Tips to Negotiate a Business Loan in India

Also if you are facing difficulty in servicing your existing business loan, business refinancing doesn’t make sense even with a lower interest rate. Your priority should be to stabilize the finances of your business and make regular repayments to build a reliable credit score.

4. Need for Collateral

Most long term business loans are secured in nature. Therefore, you have to confirm with your lender whether or not they need any form of security to collateralise the loan. The assets already provided as collateral for an existing loan cannot be used again for business refinancing. You need to provide additional collateral to raise a new loan for business refinancing. 

5. Documents for Business Loan

Check out the documents needed for online business loans before applying for it. The lender may ask for additional documents related to your business to establish creditworthiness and understand the need for business refinancing. For example, how the loan amount has been utilized and the potential benefits towards the growth of business profits. 

6. Circumstances Under Which You Should Consider Business Refinancing

Business refinancing is a very crucial financial decision for your business and its successful execution is very important. You should choose the option only under the following three circumstances:

• The difference between the current interest rate and the new interest rate should be greater than 1%
• When you want to extend the repayment tenure, as well as, lower the monthly payment of your existing loan
• When the value of your mortgaged property has increased significantly and want to refinance the loan with a higher principal amount and better terms & condition.

Conclusion

Over the long term, refinancing of business loans (if planned and executed successfully) provides multiple benefits in the form of freed-up cash flow, which will help you to generate more profits or re-invest the extra cash flow, flexibility in repayments, and reduced cost of long term financing. 

Alternatively, you should also not overlook the disadvantages like how it may impact your credit score, the fees associated with it and that you will have to service the loan for a longer tenure if choosing for a higher repayment tenure.  

Therefore, you should consider all the above-mentioned points before making a decision on the refinancing of a business loan.